Making Canada Relevant Again- The Economic Super-Thread

[Edward Campbell]

Conrad Black has some ideas - most of them flawed - in this column, which is reproduced under the Fair Dealing provisions of the Copyright Act from the National Post:

http://fullcomment.nationalpost.com/2013/03/30/conrad-black-raising-canada-up-while-beating-inflation-down/

Raising Canada up, while beating inflation down

Conrad Black

13/03/30

Many readers have asked that I propose some solutions to the problems, outlined in this column last week, of chronic and almost constant inflation.

I did propose, as I have here and elsewhere before, that I think the budget deficit has to be reduced with taxes on elective spending, and the economy stimulated with reduced income taxes. Elective spending is anything that is entirely optional, such as restaurant meals, holiday travel, automobiles above a certain cost and most financial transactions — but not groceries, children’s or work clothes, gasoline or fuel needed for work or home.

Part of our economic problem throughout the West has been over-reliance on a service economy that does not really add value (such as most legal and consulting bills), and on consumer spending for quickly or instantly depreciating assets. You knew George Bush Sr. was on the political skids when his economic message at the beginning of 1992 exhorted Americans not to save or invest, but to spend. This impulse in the United States, as that country outsourced 60 million jobs while tacitly admitting 20 million unskilled, undocumented workers, has helped create an immense current account deficit. Unsophisticated manufacturing departed to low-cost countries, which then supplied the U.S. through Walmart and Target.

Our own budget will be balanced if we tax optional spending adequately to produce the necessary revenue — particularly if savings and investment are encouraged by realistic interest rates and minimal capital-gains taxes. While I sympathize completely with the motives for it, I think it was a mistake for this government to lower the GST-HST almost across the board rather than just on some categories of spending, while not cutting personal and corporate income taxes.

It is a myth of modern economics that the preferred condition is constant, moderate inflation. The ideal would be no inflation: That supply and demand would always be in balance and prices would decline and volumes increase as non-inflationary prosperity increased.

Of course, a perfect balance would rarely be found, but one of the many failures in Keynesianism was the notion that governments could pile up debt to fight recession and could be relied upon to reduce debt in prosperous times. They have usually piled up the debt whether times were prosperous or not, as I lamented in this space last week. John Maynard Keynes was correct that it is appropriate to run deficits during recessions, but almost everything else he wrote was mistaken (including the flimsy canard that reparations after the First World War generated Nazism).

Canada should take the lead in restoring some value to currencies with a composite standard of measurement of currency value: One third the price of gold, one third the basic crude oil price and one third the cost of a representative consumer price index range of goods. (The gold standard alone would put too much power in the hands of mining engineers and precious metals speculators.) Some such yardstick as this would be adequately flexible, sufficiently broadly based to be impossible to manipulate, would be a discipline on currency, an immense confidence-builder, which other aspirant hard currency countries now addicted to sloppy fiscal habits would have to follow, and it would be advantageous to Canada as a country generously endowed with all the ingredients of the composite standard.

Nor should we be afraid to revive the joint public-private sector initiative. This was what built Canada, from the Canadian Pacific and (eventually) Canadian National Railways to atomic energy to the Trans-Canada pipeline. I have, at intervals, been one of those who advocated taking a joint public-private Canadian interest in Chrysler Corporation when it was financially vulnerable. The failure to do so has been an opportunity missed, though it is not too late for a Canadian-controlled automobile industry. It is, as many have observed, illogical for us to rush to divest a Canadian government-controlled oil company (PetroCanada), while acquiescing in a Chinese government-controlled one (Nexen). We have not thought this through, and we should.

And, for a combination of reasons, I think we should increase defence spending. It is the best stimulus, and the most successful form of adult education. It enhances both military and foreign-disaster relief capability, and if carried out intelligently, will raise national pride and morale. We also should involve the able-bodied unemployed in various forms of infrastructure and conservation projects, which military engineers could supervise at economic cost to the taxpayers, and it should be combined with enhanced professional and vocational training.

The federal government should get on with its $35-billion National Shipbuilding Strategy, whose cost it has obviously sharply underestimated. Canada has coasts on three oceans, and has a brilliant military tradition, having always fought with distinction, with almost all-volunteer forces, in ethically justifiable wars that our side won. We could reduce unemployment, build a serious shipyard and advanced defense industry, and become an alliance leader and looked-to country for emergency relief, instead of bumping along at about 60% of the level of military spending we promised to NATO.

The F-35, which has doubled in cost to $167-million per airplane, should be cut back. It is a metaphor for American defence extravagance (U.S. destroyers and submarines now cost $1.2-billion and $2.4-billion each). We should build our aviation industry and joint venture with lower-cost partners such as South Korea and Germany, while we reactivate our shipyards, starting with the construction of an aircraft carrier.

Canada has the sinews of an important country, but the habits of an American satellite. For our own and the world’s good, and with hostility to no one, (and certainly not the U.S.), we should grow into, but not above, our rightful status.

National Post
cbletters@gmail.com

Black is correct in say that we have "the sinews of an important country, but the habits of an American satellite". We do so because we are, already, an important country but we are, by geopolitical circumstance, also an American satellite - and partially, by coice, too.

Black's economic solutions are too tricky by half. Good fiscal policy is simple and clear - slicing and dicing a consumption tax is neither. I agree that we should reduce corporate and capital gains taxes to zero - for reasons i have outlined several times - but most canadians oppose such moves so they are unlikely to happen. I also agree that we should reduce the income tax - especially for the lowest paid third of the population. But we need revenue. My answer, mt personal preference, is a Green Tax, a carbon tax which is paid, like the HST/GST by you and me - meaning it flows through all the corporate and intermediate levels with only a minor bookkeeping burden attached - whenever we start our car, turn up the heat in winter (or the AC in summer) and watch our big screen TV.

 

[a_majoor]

I don't agree with most of Lord Blacks suggestions either, but at least he is speaking to the issues (unlike most politicians) and offering ideas. Too bad we don't have many more Canadians engaging on these issues.

 

[a_majoor]

ERC has written on this subject many times, here is a powerful argument to reinforce the point that Free Trade will be a powerful tool to increase our productivity and standard of living:

http://opinion.financialpost.com/2013/04/01/a-better-trade-strategy/#more-27378

A better trade strategy

Michael Hart, Special to Financial Post | 13/04/01 | Last Updated: 13/04/01 8:30 PM ET

Flaherty would have been more on point if he had phased out all tariffs

In his 2013 budget, Finance Minister Jim Flaherty announced that Canada would “graduate” some 72 developing countries and eliminate their eligibility from Canada’s general preferential tariff (GPT), a program first introduced in 1974 to give developing countries a slight competitive edge in the Canadian market. In the budget, Flaherty suggested that countries that had reached the World Bank’s threshold as middle-income countries should no longer benefit from this lower tariff treatment. The GPT will remain in place for the remaining poor countries, a largely meaningless gesture because these countries are at best very minor trading partners. Some critics have pointed out that this move amounts to a potential increase of $330-million in duties on products imported from middle-income countries, a tax burden that will fall on Canadian consumers.

Others have suggested that this move creates greater incentive for these countries to come to the negotiating table and conclude a free trade agreement with Canada, the net result of which would be better trading conditions for everyone. Both points are trivially true, but are mismatched to today’s trading realities. Flaherty would have been more on point if he had announced that he was phasing out all tariffs from all sources and their related administrative procedures — from classification and valuation requirements to rules of origin — and inviting other countries to join Canada in focusing their negotiating energies on more important matters.

The world has become increasingly intertwined in response to demands by producers and consumers alike for the best products, services, capital, and ideas, in the process creating jobs and wealth across many sectors and accelerating the forces of mutually beneficial global integration. The rapid emergence of a group of aggressive new economies, from China and India to Indonesia and Brazil, with pressing new priorities and a different appreciation of the rules of the game, have put Canada in an unenviable position: Our trade is concentrated in the slow-growing mature economies of the past rather than with the rapidly growing new economies of the future. We need to re-orient both our domestic and international economic priorities.

Complicating this challenge is the unfortunate fact that the rules and institutions of the postwar trade regime are no longer well suited to the global trade and production patterns that have emerged over the past few decades, in part thanks to the success of the earlier regime.

The development of much more fragmented production strategies, the ability to disperse production much more widely around the world, the emergence of new security threats, and the reality of a much wider range of cross-border transactions all point to the need to look at a new set of policy issues that threaten to disrupt the beneficial process of international integration and specialization.

The effects of these new trade and production patterns and the limits of traditional trade negotiations and instruments are reflected in the relative decline of Canada’s trade performance over the past decade.

Canada weathered the 2008-09 recession better than most other OECD economies, thanks to prudent fiscal management and other reforms. Its trade performance, however, remains underwhelming, in part because of anemic demand in its major markets and in part because of self-imposed barriers to greater engagement in emerging markets.

In these circumstances, the federal government should pursue a trade strategy that leads to a much more open economy and recognizes that reforms begin at home. It should begin by dismantling a range of policy instruments that reflect an earlier reality, from tariffs and trade remedy measures to subsidies and government procurement preferences.

As a happy by-product, such reforms would contribute to improving Canada’s productivity performance, reduce charges to the public purse by eliminating the need to administer these complicated instruments of the past, and reduce cost differences between Canada and the United States. In an age when governments face rising education, health, and other social costs, savings from the elimination of programs that raise consumer costs and undermine the ability of Canadians to compete and create wealth in the global economy should be compelling.

Traditional trade negotiations have become much less important, in part because the trade negotiations of the past created a solid framework of rules and commitments by all major traders to keep their markets open. Remaining pockets of protection are more likely to be eliminated through smaller and more focused negotiations than the grand multilateral rounds of the past. Canada needs to tailor its approach to such negotiations more strategically, focusing scarce resources on issues and markets that are likely to make a material difference to Canadian producers and consumers.

Canada needs to focus its limited resources where they are likely to make a difference. Changes in both Canadian and global trade and production patterns indicate that, in addition to continued efforts to reduce border and regulatory impediments in North America, engagement with East Asia should be a priority. To that end, Ottawa should avail itself of both existing and emerging opportunities to strengthen transpacific relations, from the TPP initiative to new institutional links and agreements with the most important players in Asia.

Meaningful agreements with these emerging economies should focus on integrated disciplines on state trading, investment, and competition behaviour rather than on the customs issues of the past.

Financial Post

Michael Hart holds the Simon Reisman chair in trade policy at the Norman Paterson School of International Affairs at Carleton University.

 

[a_majoor]

Andrew Coyne on the dangers of Sovereign Wealth Funds like the Alberta Heritage fund. I absolutely agree that haviing thousands or millions of small accounts spread over thousands or tens of thousands of different investment opportunities provides greater breadth and depth to an economy than centralizing the investment pool (and this also makes the economy more resistent to shocks and "black swan" events). Sadly, the attractiveness of having a huge resource pool to reward followers and punish opponents is the key reason for politicians to advocate for such concentrations of funds, so unless there is a concerted effort by voters to change things, there will be no changes:

http://fullcomment.nationalpost.com/2013/04/05/andrew-coyne-governments-aim-to-keep-surplus-energy-revenues-from-hands-of-vulgar-public/

Andrew Coyne: Governments aim to keep surplus energy revenues from hands of vulgar public

Republish Reprint
Andrew Coyne | 13/04/05 9:03 PM ET
More from Andrew Coyne | @acoyne

The two most dangerous words in economics are “we need.” Taken together, they indicate the speaker has put aside the careful weighing of costs and benefits that is the ordinary stuff of economics, in favour of sweeping, absolutist prescriptions of what is self-evidently good for all: of what we need. They imply not only an impressive certainty about matters that are by their nature vastly uncertain, but an unexamined conviction that one’s own preferences — I might almost say tastes — in economic activity may be taken for everyone else’s.

Energy seems particularly prone to this sort of windy proclaiming: maybe there is a feeling that God-given resource endowments offer a suitably biblical setting for the issuing of commandments. Here is a typical passage from a recent essay in Policy Options: “We need to decide where resource development fits within the broader context of our national interests. We have national interests that need to be articulated both domestically and to international investors. To achieve the status of resource superpower we need to resolve the national debate on the virtues of resource extraction and accept our role in the world.” Quite what any of this means in concrete terms the reader is left to guess, but the hortatory power of those two words, we need, is undeniable.

Just now what everyone seems to agree we need are sovereign wealth funds, a place for governments, notably Alberta’s, to sequester surplus oil and gas revenues, safely out of the hands of the vulgar public. The Canadian International Council (“We need a Team Canada mindset… we need companies that are or can become global players… etc”), the Pembina Institute, the Canadian Centre for Policy Alternatives, even the Fraser Institute have all issued reports in recent months calling for the creation or expansion of such funds. Of course, in the interim the notion of “surplus” revenues has become something of an abstraction, but nonetheless the necessity of governments annexing a larger share of resource wealth and investing it on the public’s behalf is taken to be self-evident.

Related
Jen Gerson: Ontario prof mistakes personal views on oilsands for reasoned argument
Andrew Coyne: The problem isn’t where Mulcair spoke about Keystone, it’s that he’s wrong

Well, maybe not entirely self-evident. Sometimes the argument is that a portion of the oil output must effectively be quarantined lest it show up instead as export earnings, thus driving up the dollar and leading to the dreaded Dutch Disease. Sometimes the argument is that the revenues should be invested in ways designed to diversify the economy, allowing Canada to move up the value-added chain and escape from the resource extraction ghetto. More generally, the belief seems to be that, if far-seeing governments did not save and invest for the future, no one else would. As a press release from the Fraser Institute — yes, the Fraser Institute — explained: “Failure to save resource revenues in Heritage Fund leaves little for Alberta’s future generations.”

About the Dutch Disease argument perhaps little more needs to be said. The issue is not whether a high dollar is harmful to the manufacturing sector: it is why the interests of manufacturing should be presumed to take precedence over those of the resource sector, to the point that the latter should be subject to a special tax for the former’s alleged benefit. The same applies to the diversification argument. If there are higher economic returns to be had by switching from resource extraction to refining and other secondary industries, the people in those industries are surely at least as capable of seeing this as politicians, and of redeploying their capital accordingly. If there are not, it hardly makes sense for the government to take it and do it for them. (If the issue is diversifying out of fossil fuels, in particular, for planet-saving reasons, a carbon tax is the necessary and sufficient incentive.)

The third argument has rather more to it. It is true that non-renewable resources should be seen as an asset, as a stock of capital rather than merely a flow of funds. As such the present generation has a duty not to “eat the seedcorn,” but to preserve that capital to share with future generations. Rather than spend the proceeds on current consumption, then, the object should be to transform the capital in the ground into other forms of capital: assets yielding a stream of returns into the future.

All of that is true. What does not follow is that these assets must necessarily be held in state hands; that “investment” must automatically mean public investment. It is particularly fascinating to see people urging that funds be ploughed back into the Alberta Heritage Savings Trust Fund, given the quite astounding record of politicization and mismanagement of that honey pot. But it is hardly alone. Quebec Pension Plan, anyone?

I can think of at least three alternatives to the state-investment model that would meet the objective of capital transformation. One, the revenues could be used to pay down public debt — as any financial planner will tell you, one of the best investments you can make, the returns being the interest you no longer have to pay.

Two, rather than going into a centralized investment fund, they could be diverted into individual private plans, rather like RRSPs. They’d still be invested, but by millions of private investors, rather than a handful of public employees.

And three, they could be used as Alberta has used them: to keep personal and corporate income tax rates low. Everyone always swoons over Norway’s massive state investment fund, but the opportunity cost of that mountain of public investment has been punitively high tax rates on private investment. Alberta has chosen a different route, leaving greater room for private capital formation, not only in energy but across the economy. The resulting gains in productivity will pay dividends for generations to come.

Postmedia News

 

[CougarKing]

More from Aussie ex-PM Kevin Rudd: taking another page from Australia's book on how to deal with Asia...

Don Cayo: Lessons from Australia on how to increase trade with Asia
Investment in education and technology pays off for businesses Down Under


If you believe, as I do, that Canada could profit by taking a page from Australia’s book when it comes to trade with Asia, then you should be grateful to that country’s former prime minister, Kevin Rudd.

Rudd gave us not just a page of trade-building secrets, but several insightful chapters, during a keynote address to the B.C. Business Council’s Shared Prosperity Summit in Vancouver on Friday.

It’s no secret that the Aussies run circles around Canadians in most Asian markets. Their total volume of trade in the region, which has nearly doubled in the past half dozen years, now tops $200 billion. That is well over four times our volume of trade with all of Asia and Oceania combined, although their country is only three-quarters as large in area and two-thirds as large in population as ours.


A key to Australia’s success in the Asian market, Rudd said, was policy focus and consistency from one governing administration to the next — a surprising trait to hear stressed and applauded by a politician with Rudd’s mercurial history.

His time at the helm of government looks a little like Gordon Campbell’s — except that it was telescoped into just a third as much time. He was initially highly popular, elected in a “Ruddslide” in 2007. But he was squeezed out by his own party in 2010 over — you guessed it — an unpopular tax. (Although it is worth noting that the Labour Party PM’s “super tax” was on resource extraction, while Campbell’s “hated sales tax” was on citizens.)

But Australia’s trade strategy also involved putting some money where its mouth was — a lot of money.

First, there was massive and sustained investment in education, all the way from pre-primary to university, to produce “the best-educated, best-trained, best-skilled workforce in the world.”

Then there was $40 billion to $50 billion — the largest investment in the country’s history — in infrastructure to bring ultra-high-speed broadband to 90 per cent of the population, and slightly more sedate, but still high-speed, service to the rest.

And there has been a big push — not as comprehensively successful, but still significant — to ensure a large cadre of Australian professionals can speak a range of Asian languages, including Mandarin, Japanese, Indonesian and Hindi.

Australia has been focusing on Asia since the 1970s, Rudd noted. That is when Britain joined the EU and it finally sunk in that a strategy of relying on trade with Europe would never work well enough for the economy to reach its potential.

In addition to policy consistency and the respect for different cultures that wide-scale language learning fosters, Rudd said a handful of other principles can be drawn from Australia’s experience.

Among them, Asia is much more than just China, and the trade opportunities for countries like ours are not just in providing energy and resources. He specifically mentioned the dynamism of South Korea, Indonesia (which “will be a much larger economy than either Canada or Australia, or our two economies rolled together”), Malaysia, Singapore, Vietnam and India.


And he extolled the opportunities to be found in meeting the food-security needs of fast-growing middle classes in those countries, the boutique manufacturing opportunities that will open up for advanced countries, and a veritable explosion in demand for services, including — but not limited to — managing funds for retirement, supplementing public education, and providing health care and health insurance.

“A balance of focus and opportunities” — that is, a mix of countries and of products — is not only intrinsically valuable for a trading nation, he said, but it spreads the significant risks of over-dependence on a single customer.

For one thing, it is naive to assume the demand curve for basic commodities will continue upward indefinitely. Energy sales, for example, are likely to peak, flatten and then slowly decline starting in the 2020s.

And geopolitical risks abound in countries that may have their economies fully rooted in the 21st century but still hold fast to political attitudes and territorial disputes that appear to be straight out of the 19th.

On this point again, the Australians appear to be practising what Rudd preaches.

He noted that China, while it is his country’s biggest and most important customer, still accounts for only about 20 per cent of its total trade. That compares to more than 70 per cent of Canada’s export eggs piled — rather precariously, it seems, during uncertain economic times like we’re experiencing today— in the U.S. basket.

dcayo@vancouversun.com

© Copyright (c) The Vancouver Sun

Read more: Vancouver Sun link

 

[a_majoor]

Today's FP has some of the externalities that hamper Canadian business and stilfe productivity and raise costs to consumers. As should be expected, much of it has to do with "regulatory failure"; intrusions into the marketplace which have to be absorbed by business and either eaten as reduced profitability or passed on to consumers (guess which is the more common solution?). The low population density argument simply means that the costs are spread over a smaller number of people (similar costs in the united states are spread over a population of 300 million, so each individual consumer is dinged 1/10 the amount that a Canadian pays for particular regulations, tarrifs or taxes).

Much more room to improve:

http://business.financialpost.com/2013/04/12/why-canadians-may-never-realize-their-dream-of-having-u-s-prices/

Why Canadians may never realize their dream of having U.S. prices

Dan Ovsey | 13/04/12 | Last Updated: 13/04/12 6:00 PM ET
More from Dan Ovsey | @DanOvsey

In 2011, an average of 3.4 million Canadians made a conscious choice to hop in their vehicles each month and make a run for the border — to shop.

That trend is likely to grow in the near future given that the federal government’s 2013 budget announced the introduction of new tariffs to be imposed on goods entering Canada from 70 different countries, costing Canadian consumers an estimated $330-million more each year in retail prices.

Cross-border shopping is far from new, of course. For decades, Canadians have been traversing the 49th parallel for deals on everything from clothing and accessories to household goods, electronics and furniture. Even when the exchange rate was unfavourable and duties had to be paid at the border, the price difference still made a cross-border shopping trip worthwhile.

Most Canadians, however, presumed the price gap would narrow if and when the disparity between the value of the loonie and greenback narrowed, and were predictably outraged when that failed to be the case. To show their indignation, consumers have begun flocking across the border in greater numbers and welcoming giant U.S. discount retailers such as Target in hopes of taking advantage of U.S. prices.

If you talk to manufacturers, a lot of businesses will tell you that it’s harder to do business between one province and another than it is between Ontario and Massachusetts
Yet, blaming government alone wouldn’t be fair. A Senate Committee report released last month shows price disparity between Canada and the U.S. is the inevitable result of a variety of factors, including less advantageous economies of scale, higher transportation costs, more complex (read bilingual) packaging requirements, onerous tariffs, disparate provincial regulatory requirements, inharmonious bilateral trade requirements, a smaller consumer market and mysterious “country pricing” used by some international manufacturers to make up for the aforementioned costs simply because polite and passive Canadians are too passive to protest.

“If you talk to manufacturers, a lot of businesses will tell you that it’s harder to do business between one province and another than it is between Ontario and Massachusetts,” says Diane Brisebois, president and CEO of the Retail Council of Canada.

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Ms. Brisebois says onerous and inharmonious inter-provincial regulations make the cost of manufacturing and transporting goods across what is already a vast geography even higher. Others point to Canada’s small consumer population relative to the U.S. as another factor behind higher Canadian prices, noting the cost of doing business has to be spread out among a much smaller group. But some just don’t buy the argument.

Fred Lazar, an economics professor at the Schulich School of Business, notes there are examples of multinational retailers, like Zara and H&M, which were founded in nations only slightly more populous than Canada. (In fairness, both Spain and Sweden — the home nations of Zara and H&M respectively — have population densities significantly higher than that of Canada.)

Prof. Lazar believes the price gap boils down to competition, or lack thereof.“Take The Bay. When The Bay was just a Canadian company it lagged behind in every important characteristic of retailing.… It’s only since it brought in new management and became a U.S.-owned company that you saw significant changes and improvements,” says Prof. Lazar, noting the higher degree of competition in the U.S. forces retailers to invest in e-commerce and other innovative mechanisms that serve to reduce costs, lower prices and widen profit margins.

He isn’t alone in his belief. Martin Lavoie, director of policy at Canadian Manufacturers & Exporters noted in his submission to the Senate Committee that Canada’s top four retailers have a 28% market share compared with only 12% in the U.S.

Because retailers in the U.S. enjoy lower labour rates and have higher productivity, it allows them to keep costs down
Yet even Mr. Lavoie acknowledges there may be more to the story. “Because retailers in the U.S. enjoy lower labour rates and have higher productivity, it allows them to keep costs down,” he says. “In the U.S. they’ve made advancements in how they manage inventory.”

Then there’s the sensitive issue of Canada’s protected industries, such as dairy and poultry, which enjoy the advantage of having tariffs placed on foreign competitors in their industry. Such barriers, says Mark Milkie of the Fraser Institute, are usually reciprocated by other nations, and consumers lose out in the end.

“How you get Canada to be more competitive is you make it easier for new entrants into the market to compete against existing players,” he says.

Whether the cause is competitive barriers, higher labour costs, a smaller consumer market or something else, Canada’s retailers aren’t generating the revenue they need to invest in innovative cost-reducing technologies and operations that allow them to compete at an international level. In the end, everyone loses, especially the consumer.

Financial Post

 

[a_majoor]

While this is a US example, Ontario and Quebec are running monster deficits and debts, and many other provinces are close behind, so the lessons are relevant to us as well:

http://reason.com/reasontv/2013/04/11/gillespieondebtandspending

5 Unacknowledged, Unexpected, and Unavoidable Facts about Govt Spending and the Economy
Nick Gillespie & Todd Krainin | April 11, 2013

“Politicians are like criminals in Batman comics. They’re a superstitious, cowardly lot. And the minute that they know they’re going to lose elections because they’re spending too much money, they will find their inner cheapskate and start [spending less],” said Reason's Nick Gillespie during his speech at the Reason Weekend event in Las Vegas.

In "5 Unacknowledged, Unexpected, and Unavoidable Facts about Government Spending and the Economy," Gillespie says politicians such as President Obama and John Boehner are in denial. Influential economists like Paul Krugman and Lawrence Summers correctly diagnose debt as a problem even as they prescribe more debt as the cure.

Gillespie argues that:

We’re spending too much. Two wars, entitlement growth, and a massive stimulus are the results of a spending frenzy over the last decade.
We’ve got too much debt. Every level of government is in over their heads. The literal and figurative bankruptcies of cities such as Stockton, California and Harrisburg, Pennsylvania are the canaries in the coal mine.

Debt overhang kills growth. The latest studies are clear: excessive debt, sustained over long periods of time, hurts economic growth. Beyond the cost of higher interest rate payments, increasingly higher debt loads – which Gillespie calls “a ziggurat of doom” – promises to reduce opportunities for everyone.

Spending growth is driven by entitlements. Since the Great Society programs of the 1960s, the government has switched from providing infrastructure and basic services, to being a national insurance broker. The consequences of this are dire because, as statistician Nate Silver notes, "most of us don't much care for our insurance broker."

Trust in government is at historic lows. This kind of distrust is an inevitable result of a mismanaged economy. Yet it's also cause for optimism. Public discontent sow the seeds of reform, allowing the possibility of meaningful fiscal reform.

Gillespie's talk, in which he also sketches solutions to long-term economic malaise, is followed by audience Q&A.

Runs about 38 minutes.

Produced by Todd Krainin. Camera by Meredith Bragg and Alex Manning.

Scroll down for downloadable versions and subscribe to ReasonTV's YouTube Channel to receive notification when new material goes live.

 

[foresterab]

http://gold.globeinvestor.com/servlet/ArticleNews/story/GAM/20130418/RBCROWLEYCOLUMN0417ATL/stocks/news?back_url=yes
From today's Globe and Mail

Unemployment is not Canada's problem
BRIAN LEE CROWLEY
00:00 EST Thursday, Apr 18, 2013
 

Brian Lee Crowley is the managing director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa.

The king is dead. Long live the king - of statistics that is.

For the past 50 years, the king of economic statistics, the one awaited each month with bated breath by finance ministers, central bank governors, pundits and the general public alike, was the unemployment rate. A rising rate was political poison, a falling one grounds for governmental preening.

But those still focused on the unemployment rate as the prime barometer of the health of the Canadian economy and the prospects of individual workers probably still call recorded music "tapes" and are stubbornly waiting for the slide-rule industry to recover from its slump.

Today the statistic whose entrails we should be earnestly scrutinizing each month is the job vacancy rate. The success or failure in bringing down this crucial economic barometer will matter more than any other single measure in understanding whether we have the policy mix right.

The reason for this revolution in statistical significance is not hard to spot: Canada had the largest baby-boom generation relative to base population in the Western world, 50 per cent larger than the next closest, that of the United States.

As a result of this tsunami of workers, the Canadian labour force grew more than 200 per cent over the past 50 years. The chief economic challenge was where to put all these workers. We did pretty well, all things considered, in getting them into work, but the numbers were so overwhelming that even in the face of strong employment growth, we still ended up with big unemployment numbers. How quickly people forget that in the 1980s, Canada went through an entire decade where unemployment was never less than double digits. Even in the trough of the recent recession we avoided that fate.

But that speaks to how radically the retreat of the boomers is reshaping the economy. Over the next 50 years we can expect the number of workers to rise by a relatively paltry 11 per cent as the boomer bulge moves into retirement.

Consider, for example, that if past recessions are anything to go by, at this stage of the recovery Canada should still be struggling with double-digit unemployment and lagging the U.S. job market recovery.

Instead, Canada was the first major Western industrial economy to recover all the jobs lost in the recession, and remains streets ahead of the U.S. The headline unemployment rates are misleading because Washington measures unemployment better than Canada does. If Canada used the U.S. measure, the unemployment rate would fall to around 6.3 per cent. Bear in mind that the U.S. Federal Reserve has said it will start to raise interest rates when U.S. unemployment falls to 6.5 per cent. Canada has already passed that milestone, with a higher share of its population working than any other Group of Seven country.

Canadian statistics are further distorted because of two narrow groups, young people and immigrants, whose unemployment greatly exceeds the national rate. If they are excluded, the national rate is in the low 5-per-cent range. In other words, the problem is not on the demand side; there is ample demand for labour. Canada no longer needs general stimulus to soak up unemployment; it needs targeted programs to help pull a few outlier groups into the economic mainstream.

Also, the jobs that have been created are not of the "fries-with-that" drudgery of popular lore. Since the recession, the vast bulk of new employment in Canada has been in full-time above-average-wage work. Because of the boomer ebb tide this is no accident or unrepresentative moment. This is the new normal. Labour markets are tightening across the country, explaining the largely unremarked 3-per-cent rise in real wages in the past year, near the peak experienced during the pre-recession resource boom, and business groups constantly single out labour shortages as a huge headache.

Which brings us to the job vacancy rate. Little noticed in the recent federal budget was Ottawa's estimate that the number of jobs going unfilled is several times higher it was just a few years ago and is rising fast. In other words, the low level of unemployment is increasingly matched by rising job vacancies.

That is a red-hot labour market, with Canada's economic prospects held back because employers cannot find the right workers with the right skills to help the economy create the greatest wealth for Canadians. Memo to policy makers: Unemployment isn't the problem. Squeeze the vacancy rate if you want to make Canadians better off.



Working in the resource sector and living in a town dominated by trades alot of this makes sense locally...2 months to book a plumber, 3 months for an electrian, 3 weeks for a mechanic if they want the work.  At the same time there is a missmatch in skills where select professions do very well (instrumentation tech. ususally starts at 6 figures locally following journeyman status/millwright etc.) and some do not (hairdressers make $15/hr...Tim Hortons offers $12/hr) so for those lacking the right skill set work is tough to find compounded by alternate employment not matching cost of living....hence many temporary foriegn workers.    It is also not a national problem as traveling around Canada I am constantly amazed at the differences in employement rates/wages/options provided .  But it does speak to part of the issue facing the Canadian economy.

 

[a_majoor]

Alberta is considering a general sales tax. While the author of this post is entirely correct, the real issue is that the Government of Alberta has a huge spending problem, and will most likely NOT substitute a general sales tax for a business tax or income tax, but rather continue collecting existing taxes and apply the new tax as well. This will take a nasty bite out of the Alberta economy (and as consumption and investment falls, the Government will discover, like so many others, that their tax revenues will fall as well).

http://opinion.financialpost.com/2013/04/24/progressive-taxes-arent/

When progressive taxes aren’t
Jack M. Mintz | 13/04/24 | Last Updated: 13/04/24 3:58 PM ET
More from Jack M. Mintz

Second in a two-part tax debate series: Jack Mintz explains why consumption taxes are better than income taxes

“No sales tax for Alberta” (April 24), Professor Rhys Kesselman’s argument for a progressive income tax, will certainly please the leaders of the provincial Liberals and NDP. However, in arriving at his conclusion, he made several significant erroneous statements.

Related
Alberta’s Tax Structure Advantage

First, let’s clarify the argument as it affects my approach, with which he disagrees. I advocate a partial shift in the tax mix from personal and corporate income taxes to an Alberta HST, not the elimination of the income tax altogether. It is perilous to rely on only one major tax to fund public services, a point also raised in the 1991 GST debate about the value of catching taxpayers with two fishing nets rather than one. In fact, Alberta already has substantial consumption levies related to private and public goods, just no general sales tax.

Prof Kesselman questions the economic evidence that economic gains arise from a shift to sales from personal and corporate income taxes. He provides his own unsubstantiated impressions but fails to acknowledge the most important empirical evidence.

Professor Bev Dahlby, an internationally recognized tax economist, has developed detailed analyses of the economic cost of raising funds. In his calculations for Alberta, Prof. Dahlby shows that the existing corporate income imposes the greatest economic cost per dollar of revenue raised, followed by the personal income tax. The least economic cost would be associated with an Alberta sales tax. If Alberta raised some revenue from the HST to replace corporate and personal income taxes, this would boost the economy since a less distortionary tax would replace over-reliance on more economically costly taxes. In other words, this shift would improve Alberta’s tax advantage.

These points become clear in understanding what an Alberta HST would do. Part of the HST can be used to reduce the corporate income tax rate, significantly boosting investment. The other part would lower the personal tax, either by reducing the flat rate or increasing exemption levels.

Prof. Kesselman also errs by assuming that only the very rich have savings that are unsheltered from taxation, so that only the very rich would benefit from a switch from income to consumption taxes. As I show in the nearby table, while upper-income households account for a majority of savings, low- and middle-income households also pay taxes on their investment income. Taxable investment income is a significant share of household income at all income levels and therefore not fully sheltered from tax in pension, RRSP, TFSA and other tax-assisted saving accounts. Reducing their personal income taxes would sharply increase the yield on everyone’s unsheltered savings.

Prof. Kesselman further argues that consumption taxes and income taxes affect work incentives in a similar way. This may hold for some taxpayers but not for all: Taxpayers of different ages, incomes, and income-tested benefits react to different incentives. An income tax would hit the working population harder than a consumption tax. Even the flat Alberta tax, because it boosts the federal effective tax rates, discourages work among many taxpayers more than would a consumption tax.

Finally, Prof. Kesselman argues that a shift to consumption taxes would shift taxes from the rich to middle-income groups (assuming a low-income tax credit that shelters very low income individuals from the consumption tax). Not necessarily, and not as I suggested at the Alberta Summit. To offset the HST, an increase in the personal exemption would have the highest income groups pay more and those with modest and middle incomes pay less. In fairness, he has not seen these calculations, which will be published in a forthcoming study by Calgary’s School of Public Policy. But he should not confuse speculation with analysis.

Prof. Kesselman’s preference for a progressive income tax might be acceptable in his province of British Columbia. However, it is far from acceptable in Alberta where the Conservatives and Wild Rose, the two largest parties, express no interest in abandoning the flat tax, which has helped attract skilled workers and investment to Alberta. As both Liberals and NDP in BC push up corporate and personal income tax rates in coming years, Alberta’s welcome mat for BC businesses and investors will get well trodden.

When Albertans are asked if they favour a sales tax added to their income tax, only one-quarter do. The public has yet to be polled in its view of a tax mix, involving a sales tax accompanied by lower income taxes.

Jack M. Mintz is the Palmer Chair, School of Public Policy, University of Calgary.

 

[a_majoor]

An interesting exercise in comparative analysis. SpaceX builds and operates rockets, and launches satellites into orbit, as well as capsules of supplies to the ISS (and returns the capsules to Earth, rather than burn them up in the atmosphere). So we have established that SpaceX has some very high performance objectives to meet (the laws of physics are enforced at all times and places). SpaceX also charges far less on its website for launches into orbit than the listed prices competators like Lockheed-Martin, or even foreign entities like the ESA or the Chinese "Long March" launchers.

PErhaps if cost analysis for government programs was done the way SpaceX did, we might see big savings without the reduction of actual services or outputs (analogous to the rocket hardware SpaceX produces: if they cut corners in the actual product, we would see rockets exploding on the pad or in flight). Now SpaceX is a for profit company, so there cannot be a one to one correspondence between a government department and SpaceX, but I am willing to suggest there are broad areas where the SpaceX methodology would apply and deliver cost savings:

http://blogs.hbr.org/cs/2013/04/what_spacex_can_teach_us_about.html

What SpaceX Can Teach Us About Cost Innovation
by Tom Agan  |  10:37 AM April 25, 2013
Comments (3)     

Earlier this week, the space-transport start-up SpaceX had its most successful launch test yet with Grasshopper, the first fully and rapidly reusable rocket. This is the latest step in the company's journey to dramatically reduce the cost of space travel, and follows the first private resupply of the International Space Station with the launch of their Falcon 9 rocket and Dragon spacecraft last fall.

Initially when the start-up's founder, serial entrepreneur Elon Musk, looked at the space industry, he faced a quandary about where to innovate, given the restrictions and mandatory performance criteria for space travel. Musk quickly zeroed in on the one area ripe for innovation: cost reduction. He gathered a team with a wide cross-section of expertise and put them to work at trimming the fat.

NASA has tried for decades to provide low-cost space flight — that was the failed promise of the Space Shuttle — a reusable spacecraft to avoid the expensive building of a new craft for each mission. The complexity of the Shuttle and its reliance on 1970's technology drove costs up. Contractors paid based on their costs, with little incentive to save, increased them even more. Working against NASA as well was a heritage of exploration: unique space missions that pushed technologies and space travel to the edge. It was fundamentally different from the mindset of low-cost frequent and standardized transport that SpaceX embraces today.

SpaceX has learned. With industry veterans and outsiders, they benefit from past experiences but are unconstrained by forces and factors that pushed up NASA costs. It's not that they threw away the NASA playbook, rather they combined what worked with new ways that have the potential to dramatically reduce costs (as the Grasshopper test flight demonstrates). Their process — having a big goal, learning from the past, looking at the whole picture to find and prioritize opportunities, then refining key aspects of the space flight model to achieve their objective — is an approach that can make any organization more creative about cutting costs.

They think big. In large companies, the task of cost cutting is invariably incremental and left to finance, which works with individuals or small groups within a specific department, region, or area of the business. On the other hand, the SpaceX approach innovates and transforms by looking at the entire business model instead of the parts. Cuts weren't just made to the physical rocket itself but to everything surrounding it — overhead, support services, development timeframe, and more. With small teams and far lower overhead, SpaceX was able to go from incorporation to first space flight in six years. And we can see this occurring in other businesses too. Though traumatic, the restructuring of GM and Chrysler, including a major reduction in overhead, led to their resurgence since 2009.

They think about the future. SpaceX developed a plan for sustaining the lower-cost business model over many years. To build a business for the long haul, SpaceX wisely recognized it must embark on the complicated and risky task of developing an entirely new rocket engine. Another similar space venture is still using fuel-inefficient surplus Russian rocket engines built in the 1960's that cost more to run and maintain over time. Due to their finite number, the company has a limited future unless like SpaceX it develops its own engine.

This is where most businesses fail in cutting costs: Its results are typically analyzed narrowly by the financial impact of a reduction in one area or department over a year or two. But shortsightedness can lead to long-term problems. For instance, after one company cut product costs for years, it then looked at the sales force for additional savings. Meanwhile the mix of business had changed such that their high-touch and relatively high-cost sales force was more important than ever before. So when they reduced the sales force, a key competitor was able to gain share even more rapidly than before.

They remember that increasing profits isn't the only goal. With SpaceX's cost savings in an era of declining government budgets, reduced costs make the investment in space exploration and big science projects more viable, such as a mission to Mars. In a recent interview, Musk even suggested that a project to develop warp drive could be in the future. NASA Administrator Charles Bolden agreed it's a possible investment.

In companies, those profits can be invested in other innovation efforts like new products. For example, be savvy when adopting an across-the-board cost reduction strategy. Once identified and implemented, a portion of the savings should be selectively reinvested in products and services that offer the best prospects for future returns. Ultimately the real objective is not about cutting costs at all, but rather a redirection of investments. For a similar example in business, when former Kraft and Gillette CEO Jim Kilts cut overhead costs, he then reinvested the savings in product development and advertising to strengthen brands. Using this strategy, Kilts was able to dramatically improve financial results and stock prices.

Although the business world rarely sees cost cutting as a creative act, Elon Musk is demonstrating how it can open up vast new frontiers and play a critically important role in the innovation process. To date, SpaceX is saving the government billions by self-funding development costs rather than charging them back. Furthermore, according to company projections, their per-launch costs are projected to run 40 to 60 percent less than what's being charged today.

Developing new products and cutting costs each require an innovation mindset. Creative problem-solving skills, thinking about the long term, and adopting a holistic perspective will lead to savings ranging from incremental to breakthrough. Cost innovation — rather than simple cost reduction — can only occur once an organization broadens its approach and keeps a constant eye on the long term.

 

[Edward Campbell]

I support this move if, but only IF it is accompanied by years and years of big, Big, BIG pure research grants to the universities, starting with tens of millions of new dollars and rising to hundreds of millions of new dollars per year, year after year and decade after decade. The split - "pure" research in universities and "applied" research in the NRC - is appropriate when we have adequate support for university research in mathematics, physics, chemistry and biology.

I suspect I will be sadly disappointed.

 

[GR66]

I support this move if, but only IF it is accompanied by years and years of big, Big, BIG pure research grants to the universities, starting with tens of millions of new dollars and rising to hundreds of millions of new dollars per year, year after year and decade after decade. The split - "pure" research in universities and "applied" research in the NRC - is appropriate when we have adequate support for university research in mathematics, physics, chemistry and biology.

I suspect I will be sadly disappointed.

Agree.  Both with your prescription and your expectations (unfortunately).  It is very important to create a better path from basic scientific discoveries to practical applications that can be used by Canadian businesses.  However I would suggest that those really dramatic breakthroughs are rarely "planned" developments but rather pleasant "surprises" that transform the way we live and work.  For that reason basic scientific research...not just targeted scientific research is a must if we want to be a technology leader.

 

[GAP]

I disagree.... Why would it be government's responsibility to fund private enterprise research?

Because it won't get done otherwise?

It's not getting done now and how many millions/billions is government in all it's forms contributing?

If business does not have the get and go to innovate, then fail....the cream will eventually rise to the top.

:2c:

 

[Edward Campbell]

I disagree.... Why would it be government's responsibility to fund private enterprise research?

Because it won't get done otherwise?

It's not getting done now and how many millions/billions is government in all it's forms contributing?

If business does not have the get and go to innovate, then fail....the cream will eventually rise to the top.

:2c:

Actually, the research will get done ~ and about 85%+ of it (pure research) will get done thanks to government funding. The biggest research fund provider is the US government, largely through the defence budget. The country that pays for research tends to reap many benefits: its universities attract more and better researchers who, in their turn, produce more "outputs" that have eventual development possibilities. This is a major driver of productivity. The countries, like Canada, that are stingy with research funding attract fewer and fewer talented people and see - as we have for many decades - see lower and lower levels of productivity.

Productivity is, mainly, a management issue - and Canada has, traditionally, nurtured timid managers - but there is one place where government can make a positive contribution: research. Not "research and development," because development is and ought to be a commercial enterprise - government cannot, because they don't know how to "pick winners." But pure research is neutral and it has many peripheral benefits even when it doesn't appear to lead anywhere in particular.

 

[Edward Campbell]

Stimulus, in the Keynesian model, ought to be provide almost solely through physical infrastructure projects. Social spending does not create jobs that provide economic "flow through." While some, moderately generous levels of social spending are desirable, even necessary, it is all 'wasted."

But infrastructure spending is hard to crank up, as this article, which is reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail, illustrates:

http://www.theglobeandmail.com/report-on-business/rob-commentary/rob-insight/badly-needed-infrastructure-stimulus-hobbled-by-the-butterfly-effect/article11836961/#dashboard/follows/

Badly needed infrastructure stimulus hobbled by the butterfly effect

SUBSCRIBERS ONLY

Sean Silcoff
The Globe and Mail

Published Friday, May. 10 2013

Are austerity policies wrecking or saving highly indebted nations? The debate rages on. But even partly discredited austerity hawks Kenneth Rogoff and Carmen Reinhart agree with their rivals on one point: government stimulus spending on infrastructure can help boost economic and productivity growth.

There is a lot to recommend a ramping up of infrastructure spending to get sluggish economies back on their feet: it would put people to work and help to fix a chronic “infrastructure deficit,” whereby tens, if not hundreds of billions of dollars’ worth (in Canada alone) of roads, waterworks, bridges, electricity systems and so on desperately require repairs. Governments here have already committed billions of dollars to infrastructure since the Great Recession, but there remains a need for new “greenfield” projects, such as roads or subway-line extensions. Plus, there are well-financed private investors who are keen to invest through public-private partnerships (PPP).

The problem with infrastructure is that you can’t just decide to build today and start tomorrow – or next year. “People like us would be more than willing to build social infrastructure at a normal rate of return,” says Leo de Bever, chief executive officer of public fund manager Alberta Investment Management Corp. “But there’s nothing to build. It takes forever for everybody to say their bit, and nothing gets done.”

Big projects, particularly new infrastructure, can take years of planning and run into all sorts of opposition – in the political arena, the court system and the court of public opinion – not to mention regulatory delays and jurisdictional spats. It’s not just pipelines and gas plants: the construction of a 16-km toll highway east of San Diego was delayed by 12 years, primarily due to the endangered Quino Checkerspot butterfly, whose habitat the highway crossed.

Never mind that only two Quino Checkerspots were spotted in the area during that period: it took three court challenges, numerous environmental studies, regulatory approvals and, eventually, a $20-million habitat preservation plan by the highway concession owners just to clear all the hurdles and start building, in 2003 (The road finally opened in 2007, just in time for the housing bust, which curtailed growth and traffic; the concession’s owners filed for bankruptcy protection in 2010.)

Even a more obvious project, a proposed new bridge in Fort McMurray that would provide a vital rail link from the oil sands to the CN network has been stalled for years, partly because it’s difficult to build on muskeg but also because of indecision at the political and bureaucratic level over whether to allow the charging of tolls under a PPP arrangement.

“It’s clear we need that [bridge] and we’d like to make that happen,” says Mr. de Bever, who’s keen to participate under the right conditions. “In my mind you could probably get this done in two to three years if you set your mind to it. But for a variety of reasons it hasn’t happened.”

Investing in productive infrastructure would be a great way to stimulate economies, here and abroad. But it would take considerable political bravery. Elected officials would have to be prepared to spend considerable political capital to get projects off the ground in a timely fashion so they can make an impact when they are needed the most.

Despite being wasteful and, therefore, depressive rather than stimulating, social spending is much more popular with politicians because it attracts relatively little opposition and is easy to implement. But we need a national infrastructure programme with a considerable investment in ongoing, never ending maintenance. But that will require a much, much better quality of political leadership: brave, as Sean Silcoff suggests, and smart.

But this is Canada, so ...

 

[Kirkhill]

Not "research and development," because development is and ought to be a commercial enterprise - government cannot, because they don't know how to "pick winners." But pure research is neutral and it has many peripheral benefits even when it doesn't appear to lead anywhere in particular.

Couldn't agree more.

Negative results from research should be considered equally as important as positive results.  Also, unintended results are often far more interesting, and exploitable, than intended results.

Rumsfeld's knowns - the unintended results give clues to the unknown unknowns.

 

[Edward Campbell]

Well, Al Bore Gore was here telling us that unless we stop digging oil out of the sands the world will end ...

The Globe and Mail's Brian Gable gets it right: http://www.theglobeandmail.com/commentary/ethical-aviation-fuel/article11638060/#dashboard/follows/

 

[Edward Campbell]

A useful reminder that Canada is, broadly and generally, on the right track in this article which is reproduced under the Fair Dealing provisions of the Copyright Act from the Globe and Mail:

http://www.theglobeandmail.com/commentary/departing-carney-reminds-us-why-canada-works/article12074289/#dashboard/follows/

Departing Carney reminds us why ‘Canada works’

KONRAD YAKABUSKI
The Globe and Mail

Published Thursday, May. 23 2013

There was almost a wistful tone to Mark Carney’s final speech as governor of the Bank of Canada. As he delivered Tuesday’s farewell address in Montreal, the central banker with global Superman status must have known that his life and reputation may never be this good again.

As he heads into the lion’s den as governor of the Bank of England and point man on the solvency of Europe’s banks, Mr. Carney’s job is about to get a lot harder. He is leaving peace, order and good government behind for the vitriol, decline and dysfunction of the Old World.

His final speech in his current post was much more than a self-congratulatory valedictory address. It was a technocratic ode to his native country and an admonition to policy-makers here that the institutional framework of Canadian federalism is not to be tampered with lightly.

For all our bellyaching about Dutch disease, equalization payments and employment insurance abuse, Mr. Carney’s speech was as a timely reminder that “Canada works.” Indeed, that was the title of his monologue and it served to underscore the European Union’s fundamental design flaws.

In Canada, monetary and fiscal policy are largely in sync. Neither has to overcompensate for the other, rendering each more effective. The real linchpins of Canada’s success as an economic union, however, are its interprovincial trade, federal transfer payments and labour flexibility.

Puncturing the myth of Dutch disease, Mr. Carney insisted that “when commodity prices increase, all provinces benefit.” Yes, a higher exchange rate can hurt non-commodity exports. But a stronger currency also reduces the cost of productivity-enhancing equipment and imported inputs in Canadian manufactured goods. For instance, each car built in Canada contains about $15,000 worth of imported parts, double the global average of $7,400 (U.S.).

What’s more, differences in “real provincial exchange rates” have helped manufacturing dependent provinces adjust to a higher Canadian dollar. Alberta’s real exchange rate, Mr. Carney noted, has risen 40 per cent relative to Quebec’s since 1999. As investment in Alberta drove costs higher there, goods and services from other provinces became more competitive.

“During the recession and its aftermath, the importance of interprovincial trade was clear,” he said. “The increased demand from other provinces for Quebec’s goods and services significantly offset lost international exports.”

Where Canadian monetary policy has aimed to stimulate aggregate, or national, economic demand, federal transfer payments have helped compensate for regional inequalities of wealth. Equalization payments and transfers for health and social spending account for about a third of provincial government revenues in the three Maritime provinces and a quarter in Quebec.

Those transfers help stabilize the Canadian economic union in ways Europeans can only envy. The absence of large vertical transfers in Europe is one of the main reasons the euro zone’s weaker members got into trouble in the first place.

Oil-rich Newfoundland is now the province least dependent on direct federal transfers, although its citizens still rely more than other Canadians on employment insurance benefits. Even so, the pernicious structural unemployment that once vexed Canadian policy-makers has been vastly reduced. Canadians have increasingly moved to where the jobs are. Our national labour market, Mr. Carney noted, is almost four times more flexible than Europe’s.

“In Alberta’s case, a rising tide has lifted all boats,” Mr. Carney said. “That is because the Canadian monetary union has what Europe does not: a single financial market, a flexible national labour market and significant fiscal transfers.”

For sure, there are dangers in the heavy dependence of some provinces on federal transfers, weakening incentives for fiscal discipline. The euro zone has imposed deficit and debt limits on its members, although they have systematically been ignored. Canada has relied on market forces and attentive voters to keep provincial spending in line, with better results. Even so, fast-rising debt levels in Ontario and Quebec carry risks for the entire Canadian economic union.

The next Bank of Canada governor, Stephen Poloz, and Finance Minister Jim Flaherty still face the considerable challenge of weaning Canadians off cheap mortgage debt and, as Mr. Carney put it, “to rotate the sources of growth” to exports and business spending. And much more investment in human capital, infrastructure and innovation is needed to keep Canada working.

Yet, for all its flaws, Mr. Carney is leaving a country that gets most of the big stuff right. His final speech was a warning to current and future policy-makers not to screw it all up.

It is possible, of course, to "screw it all up," and there are even some provincial premiers, like Pauline Marois, who are actively trying to do that, but I think Stephen Harper, Jim Flaherty, Stephen Poloz, Kathy Dunderdale, Kathleen Wynne, Brad Wall, Allison Redford and Christy Clark are sound enough people to pull together to avoid the worst.

 

[Edward Campbell]

Interesting graphic from the Pew Research Centre illustrating levels of confidence in the economy:

The percentage who say their national economy is "good:" China=88%, Philippines=68%, Canada=67%, US=33%, and France=9%.

(Thanks to Roland Paris, at uOttawa (but currently a visiting prof at Sciences Po Paris for this chart.)

 

[Edward Campbell]

I have remarked, several times, that even if Canada is not really one of the G7, if we're talking GDP, or even one of the "top ten" we remain one of the "top ten percents" - which is a nice way of saying"top twenty."

There is an interesting article in The Atlantic which is headlined: Emerging Power: Developing Nations Now Claim the Majority of World GDP. That's not really news but the article is accompanied by a useful graphic that illustrates the changes in the "top ten:"

You can, clearly, see the relative decline of America and rise of China but it is important that, by other measures, like GDP per capita, while China's rise is very real America's decline is not.